November's Theme for Jobs: Rebound

November 30, 2005

By Rick MacDonald After two hurricane-depressed

employment reports, the market is expecting a bounce to more normal payroll growth with the November release, scheduled for Dec. 2. We at Action Economics expect a payroll rebound of 175,000 in November, following the tepid 24,000 average in the past two months that faces the usual possibility of upward revision.

Our forecasts for the report's remaining components are in line with economists' median estimates, with the unemployment rate and the average workweek both steady, at 5% and 33.8 hours, respectively, and hourly earnings growth at 0.2%, following the 0.5% spike in October. Overall, data in line with our forecast would suggest that the labor market remains healthy, despite some lingering restraint in payroll growth.

CONSUMER SENTIMENT JUMPS. The data should show labor market trends normalizing following the late-summer hurricanes. A payroll bounce in November is strongly signaled by historical precedence following prior storms. Payrolls generally fall short of the underlying growth trend in the survey period that captures the hurricane, but then rebound in the months afterward.

Interestingly, the workweek doesn't tend to be affected. Given the lack of a bounce in October, there's a chance of a particularly large move in November as an unusually long, two-month period of weakness is reversed.

Forecasts of a big rebound in November following weakness in September and October are also supported by key consumer sentiment gauges. The University of Michigan's consumer sentiment and the Conference Board's

consumer confidence surveys revealed surprisingly large gains in November, which implies a similar pattern in payrolls. Both surveys still remain below pre-hurricane August levels, however, which suggests reason to be cautious.

STRONG FACTORY NUMBERS. The downtrend in

initial jobless claims through November also supports forecasts of a near-term rebound in job growth, especially given the concentrated drop in the week during which the Bureau of Labor Statistics conducted its survey. But the high level of continuing claims that has lingered since the hurricanes implies risk that the overdue bounce in payrolls ends up being pushed back yet another month.

Other reports are issuing favorable signals. The most recent Help-Wanted index rose to 39 from 38. The Hudson Employment Index rose 3.7 index points, to 100.5. Most important, the factory sentiment surveys all revealed a strong tone in October.

Specifically, the employment component of the Institute for Supply Management's November survey jumped to 55 from 53.1, which marks the highest level since February, and bodes well for the factory and temp employment numbers. Given the economy's momentum and the historically lean level of inventories, there appears to be strong support for a return of hiring in the factory sector.

THE REBUILD EFFECT. While the early-month release of the November employment report has reduced the lead time for many of the usual signals, the limited amount of data currently available supports solid growth on the month. Specifically, the employees index from the Philadelphia Fed survey rose to 19.1 in November, from 17 in October, which left the index at the highest level since September, 2004.

Overall, despite fears generated by higher interest rates and the temporary spike in energy prices, it's clear that the economy has absorbed the "disruption effect" of the hurricanes well and has moved on quickly to the "rebuild" phase. Payroll growth should reflect the rebuild effect as soon as this month, and this effect should continue to boost payroll gains through at least the first quarter.

MacDonald is global director of investment research and analysis for Action Economics